Question 1

A security can exist in the absence of a formal certificate evidencing the investment and also in the absence of an interest taken in the tangible assets of the company being invested in.

Accepted Answer

The Howey test did not require a formal certificate or interest in assets as long as the four criteria stated by the court exist.

Question 2

The sales of securities in the secondary market does not raise capital for the business whose stock is sold.

Accepted Answer

The secondary market is the selling of stock previously sold to raise capital and involves only investors buying and selling between themselves.

Question 3

If a company files bankruptcy,preferred stock holders have priority over common stock holders and will be paid from the bankruptcy estate first if payments are to be made.

Accepted Answer

The advantage of being a preferred stock holder is that in the event of a bankruptcy, they get paid before common stock holders get paid.

Question 4

Blue-sky laws refer to federal security laws that preempt state security laws.

Accepted Answer

State security laws are commonly referred to as blue-sky laws.

Question 5

MFK Corp.wants to raise capital and is considering an offer of bonds and debentures.They are not sure of a particular disclosure requirement so they pose their question to the SEC and they request an interpretation letter.If the SEC issues an interpretive letter addressing MFK's question and MFK follows the statements contained in the letter,MFK will not be able to be penalized by the SEC should the advice incorrect.

Accepted Answer

The SEC is not bound by the statements they issue in interpretive letters they issue.

Question 6

Securities may not be sold or marketed to the public until the SEC has completed its review phase and the registration becomes effective.

Accepted Answer

During the review phase the securities may not be sold but they may be marketed.

Question 7

Debentures are unsecured equity instruments that are issued by a corporation.

Accepted Answer

Debentures are unsecured debt instruments that are issued by a corporation and backed only by the corporation's promise and the corporation's general credit.

Question 8

Violation of Section 16,a finding of short-swing liability,does not require evidence of the use of insider information and is deemed a strict liability provision.

Accepted Answer

Section 16 is a strict liability provision so proof of the use of insider information is not necessary.

Question 9

Federal securities laws can,depending on the language and circumstances,classify a business plan as a form of securities offering.

Accepted Answer

The language of a business plan can create a securities offering.

Question 10

Issuing securities to the public markets the first time is called an initial public offering.

Accepted Answer

An IPO occurs the first time securities are openly sold.

Question 11

Annuities issued by insurance companies are exempt from full SEC registration requirements.

Accepted Answer

Annuities and other issues of insurance companies are exempt from full SEC registration requirements.

Question 12

Security sales to venture capitalists often do not require full registration.

Accepted Answer

Sales to venture capitalists are considered private placements and full registration is not required.

Question 13

Most common stock enjoys voting rights; however,common stock may be sold without voting rights.

Accepted Answer

Typically, common stock enjoys full voting rights; however, it may be sold without voting rights.

Question 14

Prior to the passing of the Sarbanes-Oxley Act,the auditing in the accounting profession was self regulating.

Accepted Answer

The Sarbanes-Oxley Act created the PCAOB which ended self regulation of auditing.

Question 15

When a corporation issues securities under a nonpublic offering or safe harbor exemption from SEC regulations,they are free of the burden of supplying any disclosures to the investor due to the investors experience and knowledge of the process.

Accepted Answer

Even when security is issued under an exemption, certain disclosures must be made.

Question 16

of the '34 Act is aggressively used by the SEC in terms of insider trading enforcement.

Accepted Answer

Insider trading is monitored by the SEC and enforced through rule 10(b)(5) of the '34 Act.

Question 17

The promissory note securing a home mortgage is a security instrument.

Accepted Answer

A promissory note securing a home mortgage does not constitute a security instrument.

Question 18

The original Howey test required that the investor have no involvement with the generation of profits,however,modern courts have permitted a limited passive involvement on the part of the investor.

Accepted Answer

Modern courts have permitted limited passive involvement by the investor as long as the promoter/agent is the primary source of the profit efforts.

Question 19

The foundation and underlying principle of all securities regulation is disclosure.

Accepted Answer

Most security sales questions and fraud investigations are based on whether proper disclosure was made.

Question 20

Investors holding debt instruments are primarily interested in a fixed rate of return on their investment regardless of the profitability of the company.

Accepted Answer

Debt instruments are not a speculative investment with bond and debenture holders looking for a steady fixed rate of return.

Quiz 16: Regulation of Securities, corporate Governance, and Financial Markets